Tax-smart gifting strategies

Have you been thinking about your taxes recently? Many of us do in the early part of the year, as taxes — and how to reduce them — are often top of mind in the lead-up to tax day. This year, it’s especially important to review your gifting strategy (including your estate plan) to consider taking advantage of higher gift tax exemption amounts while they’re still in place.

The higher estate and gift tax exclusion is scheduled to sunset at the end of 2025. This change will mean a roughly 50% reduction in the lifetime estate tax exemption — a change that should nudge families of wealth to review their plans on a regular basis and consider making changes based on the latest information.

Jaclyn Smith, senior wealth strategist, and Harry Drozdowski, family office senior trust advisor, say clients should consider taking advantage of the elevated exemptions in 2024 and 2025, if possible. But they say revised gift tax exemptions are only one reason families of wealth may want to consider making updates this year and next.

“People’s circumstances change,” says Smith. “Their level of wealth may be changing year over year, too, so there’s always opportunity to review existing wealth plans to see if improvements are necessary.”

Here, they share what families should know about wealth transfer taxes in 2024 and provide gifting strategies to consider in a tax-efficient estate plan.

Gift tax exemption rate changes

The tax-exempt federal estate and gift tax threshold in 2024 is $13.61 million per individual ($27.22 million per couple) during a lifetime or at death. In addition to the lifetime exemption, the annual gift tax exclusion has increased to $18,000 per donee in 2024, which means a donor can make gifts up to $18,000 to as many individuals as they like before reducing their lifetime limit or incurring gift tax.

“There’s an expectation that both the lifetime and the annual exemption amounts (which are indexed for inflation) may increase again next year unless there are changes to the law,” says Smith.

People’s circumstances change. Their level of wealth may be changing year over year, too, so there’s always opportunity to review existing wealth plans to see if improvements are necessary.

Gifting strategies to consider before tax cuts expire

Families that may face estate tax liability in 2026 and beyond can help heirs by discussing strategies with their advisors. Here are some ways to help make the most of the gift tax exemptions:

1. Consider taking advantage of annual gift tax exemptions. With the 2024 annual gift tax exemption, parents can give up to $18,000 per recipient tax-free without impacting their lifetime gift tax exemption. Over time, that can be beneficial to families of wealth. “If you give $18,000 to 10 family members this year and next, that’s $360,000 you’ve removed from your estate in two years without using your lifetime exemption,” Drozdowski explains. “Sometimes, we see folks who have had long, healthy lives, and they’re on their fourth generation of family. They can give hundreds of thousands, or potentially millions, when there are dozens of children, grandchildren, nieces, nephews, and other family members.”
2.  Look at locking in appreciable assets as early as possible. Assets that increase in value, like investments or real estate, can quickly erode a family’s lifetime gift tax exclusion, especially when the asset is expected to stay in the family through the generations. Smith says acting now can help maximize a donor’s lifetime exemption and minimize their eventual tax burden. “If you can transfer an asset today that is expected to stay in the family generationally, you’re transferring it at a lower value than it might have in the future.”
3. Consider trusts for income tax benefits, establishing and retaining control, and helping ensure family legacy. For individuals who have built their wealth through a family business or other closely held enterprise, there can be tension between giving up control of those assets versus the financial benefits of lifetime wealth transfer planning. “For these business owner clients,” says Drozdowski, “the thoughtful use of gifting trusts can help resolve this tension. For example, a business owner may transfer the economic benefits of a business interest, including future appreciation, but may continue to control and operate the business in the same manner they did prior to making the gift.” Drozdowski adds that “while the techniques business owners are leveraging to transfer wealth, retain control, and help minimize taxes are becoming increasingly common, it’s important that they are guided by a team of skilled legal, tax, and financial professionals to avoid potential pitfalls.” Beyond the tax and control benefits that may come from trust planning, placing gifts into trusts can provide spending guardrails and asset protection that can be beneficial to the recipient and to the family finances, particularly if the beneficiary is a minor or if there’s a concern about commingling assets. “Trusts can open the door to meaningful family values conversations,” says Smith. “Educating children on why the family employs certain trust structures or gifting strategies can be a great way for parents to facilitate legacy conversations across generations while they’re still alive.
4. Consider the timing of gifts in your strategy. Wealth creators often focus on building fortunes during their lifetimes and leaving financial gifts at their passing. Drozdowski says this strategy could leave the estate vulnerable to risk and greater tax exposure. “Imagine instead you took what you planned on investing for your children and placed it in a trust for them each year,” he says. “Now, the money is securely controlled in a trust that can continue acquiring assets — and it’s no longer part of your taxable estate.” Taxes aside, Drozdowski adds there is a non-monetary benefit to sharing in the gift recipient’s gratitude: “My clients find real joy in being present to make the gifts they intended to leave at their passing.”

Assess your financial picture to determine your gifting strategy

Before exploring various strategies, Smith says wealth creators should discuss their short- and long-term needs with their advisors to help ensure gifting does not interfere with their financial objectives.

“It’s important to understand the needs of the client and make sure they’re not gifting beyond what they need for themselves,” she says. That means establishing a financial baseline by examining balance sheets and cash flows and forecasting expected appreciation within the estate. Once the baseline is confirmed, modeling various scenarios helps clients to make informed decisions about any wealth transfer strategies and understand the expected potential impact prior to implementation. “When individuals are achieving their financial goals and living the way they intend, we can begin thinking strategically about the surplus to help minimize potential estate taxes in the future.”